What You Can Invest In
Investment Trusts, Unit Trusts and OEICs
- Investment Trusts
- Unit Trusts
- OEICs (Open Ended Investment Companies)
- TD Waterhouse Fund Supermarket and Fund Search (Unit Trusts and OEICs)
Investment Trusts, Unit Trusts and OEICs (Open Ended Investment Companies) are all managed funds. An Investment Trust is a company quoted on the London Stock Exchange whose main activity is to invest in the shares of other companies. A Unit Trust is a fund into which investors pool their money. This money is owned by Trustees but invested by professionals, typically in cash, shares and gilts. An OEICs (Open Ended Investment Companies) has an open ended capital structure in that its capital can be increased and decreased by issuing and redeeming shares.
What are Investment Trusts?
An Investment Trust is a company quoted on the London Stock Exchange whose main activity is to invest in the shares of other companies. At TD Waterhouse, Investment Trusts are traded through the normal equity dealing channels.
An Investment Trust (IT) may be suitable for investors who don't have the time, desire or knowledge to pick shares themselves or who are attracted by the idea of spreading their capital across the portfolio of shares contained in an Investment Trust.
How do Investment Trusts work?
The shares of Investment Trusts go up and down according to supply and demand or market forces.
When shares in Investment Trusts are purchased, the customer is buying a 'share' in all of the companies that the Investment Trust decides to invest in. The dividend income the customer will receive from the IT, and the value of their IT shares, will rise and fall in line with the performance of the shares which the IT owns and market forces.
There are a number of tax advantages to IT investment, and they are also well suited to people who want to make regular monthly savings for their retirement, for their children, or for specific purposes like school fees or house purchase.
How risky are Investment Trusts?
The risk associated with an Investment Trust is less than individual equities because an Investment Trust is a basket which is diversified and balanced out by a number of equities. But an Investment Trust only consists of equities so if the equity market drops it is not possible to switch into another type of investment class.
Investment Trusts are a useful vehicle for people who want to invest in the stockmarket over the medium to long-term, who want to spread their costs and risk, minimise charges, and who don't want to have to spend too much time monitoring their investments.
What are Units Trusts?
A Unit Trust is a fund into which investors pool their money. This money is owned by Trustees but invested by professionals, typically in cash, shares and gilts.
The Investor receives a number of units of the fund in exchange for their investment.
How do Unit Trusts work?
All units of the fund rank equally and at any one time, the value of a unit reflects the total value of the funds under management divided by the number of units in existence. This is known as the Net Asset Value (NAV). Therefore, the value (price) of a Unit Trust is a direct function of the value of assets held by the trust.
Unit Trusts have dual pricing this means there is a price at which you can buy them and a price at which you can sell them. The difference between those prices is called the spread.
They are 'Open Ended' so when new monies are received by the managers, new units are created. When investors withdraw their money from the pool, the units are cancelled in exchange for their cash value, which is returned to investors.
When new monies exceed redemptions, the managers will have additional cash to invest, but if redemptions exceed new monies, then it may be necessary to liquidate some of the fund's underlying investments to meet these redemptions.
Unit Trusts must be approved by the FSA (Financial Services Authority).
Unit Trusts are run by Trustees.
How risky are Unit Trusts?
LOW RISK - Cash or Money Market Funds
- Value of investment is less likely to fall, although the return may vary.
- Closely resemble bank or building society accounts but with potentially higher yields.
- Even small deposits attract top money market interest rates and the customer is not locked in.
- Typically these are most suitable for investors wishing to invest in the short term e.g. 1 - 2 years.
MEDIUM RISK - Bond Funds or mix of Equity Income and Bond Funds
- Value of investment may fall as well as rise in the short term.
- Bond Funds provide investors with a good level of income and some growth of capital in a low to medium risk environment. Most bonds pay a fixed interest rate and though the price may fluctuate, it does so less than a share.
- UK Bond Funds feature in Gilt, Corporate Bond & other bonds sectors, but some funds invest internationally, where managers take advantage of varying interest & currency rates.
- UK Equity & Bond Funds combine both UK bonds and UK company shares. They provide a relatively good income stream & more security of capital than a fund solely investing in shares, sometimes referred to as balanced funds.
- Global Bond Funds - usually better suited to savers with long term horizons, as they have additional currency risks due to their global nature.
- Typically, these are most suitable for investors wishing to invest over the medium term e.g. 3 - 5 years.
HIGHER RISK - Equity Funds or mix of Equity Income Funds or mix of Equity Income and Bond Funds
- Rollercoaster in short term - sharper rises and falls.
- Aim for growth in capital and income.
- Vast choice of funds or possibilities for combinations of funds to achieve these objectives.
- Investing in equities over periods of five years or more provides growing income as well as increasing capital values, outpacing inflation rate.
- Suitable for investments over the longer term e.g. 5 years+.
- This is the most popular class in the UK with over 80% of retail Unit Trusts.
What are OEICs?
OEIC stands for Open Ended Investment Companies, their business is investment in securities. The OEIC has an open ended capital structure in that its capital can be increased and decreased by issuing and redeeming shares. Unlike a Unit Trust, OEICs are single rather than dual priced, based on their Net Asset Value (NAV).
How do OEICs work?
OEIC's use the money raised from shareholders to invest in other companies. They are open-ended, which means that when demand for the shares rises, the manager issues more shares. (With an Investment Trust, if demand exceeds supply, the response would be a rise in the share price).
They have a corporate rather than a trustee form. An Authorised Corporate Director (ACD) is responsible for operating the company in accordance with the regulations and with the OEICs instrument of incorporation. OEICs have a single price based on NAV (Net Asset Value), which is different to the buy/sell prices of a Unit Trust. This single price is more transparent as customers can see their charges more clearly. Many former Unit Trust's have adopted an OEIC structure.
OEICs must also have a Depository who is responsible for the safekeeping of the scheme's property and ensuring that the regulations are complied with, much like the role of the Trustees of a Unit Trust.
TD Waterhouse Fund Supermarket and Fund Search (Unit Trusts and OEICs)
TD Waterhouse customers can trade within the TD Waterhouse Fund Supermarket which gives you access to over 400 Unit Trusts and OEICs (Open Ended Investment Companies) from the UK's top fund providers. Research tools provided by Financial Express allow you to research funds and their past performance. We do not charge dealing commission on Unit Trust trades and we reduce initial sales charges (which can be up to 5.5%, by at least 57% and up to 100%).
Find out more about the TD Waterhouse Fund Supermarket.
Which account should I choose to invest in Investment Trusts, Units Trusts and OEICs (Open Ended Investment Companies)?
You can invest in Investment Trusts, Units Trusts and OEICs (Open Ended Investment Companies) through our Trading Account, Trading Plus Account, Trading ISA or SIPP Accounts.